JP Morgan has given 'Overweight' on four bonds of Adani Group; preference for cash flows over security
Dec 06, 2024
New Delhi [India], December 6 : JP Morgan has given an 'Overweight' (OW) rating on four bonds of the Adani Group, including three issued by Adani Ports and Special Economic Zone (APSEZ) and one by Adani Electricity Mumbai Limited (AEML), a subsidiary of Adani Energy Solutions.
"The ability to scale and grow using internal cash flows in the case of Adani Ports gives us strong comfort on the intrinsic equity value of such a business, which in turn reduces the scope for credit stress" says JP Morgan report.
The recommendation is based on better spread pickup and shorter maturity. It also expressed comfort in the ability of Adani Ports to leverage internal cash flows for growth, which it views as a strong indicator of the company's intrinsic equity value and reduced credit stress.
Under the risks section, JP Morgan noted that Adani bonds could outperform expectations under three scenarios: a quick resolution of the SEC/DoJ charges, successful refinancing of upcoming bond maturities, and improved operating performance.
However, it cautioned that negative outcomes from legal challenges, related-party transactions, or debt-funded mergers and acquisitions could weaken the group's credit profile.
The financial services firm adopted a neutral stance on five other Adani bonds and is underweight (UW) on one bond, issued by Adani Green Energy Limited (AGEL).
The ratings come amidst a recovery in the performance of Adani Group bonds, which had experienced volatility following indictments by the U.S. Securities and Exchange Commission (SEC) and Department of Justice (DoJ).
Bond spreads have since stabilized, widening by 100-200 basis points (bps) overall. Short-tenor bonds witnessed more pronounced spread widening, driven by higher dollar bond prices. Among these, APSEZ bonds widened by an average of 140 bps, ADTIN bonds by 180 bps, and Adani Green Renewable Group (RG) bonds by 150-160 bps.
However, JP Morgan's preference has been shifted to shorter-duration bonds, including ADSEZ 2026s and ADTIN 2026s, due to their attractive yield-to-worst and reduced tenor risks.
JP Morgan highlighted its preference for APSEZ bonds, specifically ADSEZ 2032s, over the longer-tenor ADSEZ 2041s.
JP Morgan's analysis further touched on the group's liquidity needs, with notable near-term debt maturities. For instance, Adani Green faces a USD 1.1 billion construction loan due in March 2025, while APSEZ has a USD 290 million facility due in January 2025.
The firm expressed confidence in refinancing capabilities, particularly for APSEZ's secured debts, such as the Haifa Port loan backed by Israeli financial institutions.
However, Adani Green's situation remains under greater scrutiny due to its leverage and focus on operationalizing under-construction projects.
The investment bank also addressed concerns over unsecured nature bonds, particularly from APSEZ, and mitigated risks through the entity's strong cash flows.
While unsecured bonds lack stringent distribution covenants, JP Morgan emphasized that healthy balance sheets and robust revenue generation provide comfort to investors.
